DEFERRED COMPENSATION PLANNING
Key employee incentive plans are designed to align key employee focus with that of ownership. These plans attract and retain key employees to a firm by providing an incentive to maximize growth in key areas of operations. As current owners plan their ownership or management transition, it is important to have an effective strategy for retaining key employees. This requires a host of critical decisions, including the development of compensation plans, which serve to incentivize and increase the probability of employee retention.
For many years we have helped clients design and implement synthetic and actual equity plans that have proven effective through all parts of the business cycle. Our experience has allowed us to define a proprietary and unconflicted process centered on the specific objectives of each business owner. Below is a list of the primary plans we help build and implement.
The employee is “credited” with an ownership stake equal to a certain percentage of the company but does not receive any shares. At some point in the future this stake is “re-purchased” by the company. The value of the company, and the portion of that value attributed to the employee’s phantom shares, determines the amount of the payment.
STOCK APPRECIATION RIGHTS
In concept, a SAR plan works much like options do in the context of a publicly traded company. Each participant is issued a number of Stock Appreciation Rights (SARs) in the company. At the time of issue, the rights are worth nothing: the ‘execution price’ (analogous to a strike price in an option) of the SAR is the same as the current per SAR value of the company. As the company grows, the difference between the current value and the execution price enables the participant to benefit from the growth in value of the company.
The employee is credited with a bonus to be paid at a specified time in the future, assuming they are still employed. This bonus can be paid in a lump sum or over a period of years.
- The employee is contractually tied to the business in exchange for the promise to be paid additional cash compensation in the future. So long as the employee fulfills the contract.
- These plans attract and retain key employees through meaningful incentives while enabling them to think/act like owners.
- The employer receives a tax deduction for the compensation paid to the employee (at the time a benefit is paid).
- Unlike an ESOP, the terms are completely flexible at the plan’s inception.
- Deferred compensation planning can be utilized by companies in growth, expansion, mature or exit stages of their life cycle.
- Is an effective alternative to actual ownership in the company.